Franchise Opportunities - Post Wind-Down

[Mike Whitty]

It’s been a summer of soul searching, franchise evaluation and new opportunities for many dealers. Dealers losing franchises as well as dealers going forward have been reviewing their markets and making changes to their holdings in an effort to greet the return of the new car buyer in the coming months. In the midst of all this industry confusion, a few select manufacturers are positioning themselves to establish dealer count in previously ignored markets. The manufacturers in the game are looking closely at specific criteria and selecting a handful of new dealers among hundreds, if not thousands, of applicants. Those in the game of trying to secure one of these franchises should be aware of the criteria that go into new dealer selection.

The first point on the checklist for factory market representation departments today is the desire to find dealers who are in the position to offer an exclusive facility. Furthermore, a facility that is immediately ready for retail and can be quickly converted to their latest image program. There are more exclusive new vehicle dealership facilities available today than at any time in automotive retailing. Manufacturers looking to move into a new market won’t settle for anything less. Aggressive tier 2 retailers striving to achieve tier 1 status understand that this is an excellent time to upgrade their exclusive dealer counts. They are also looking at markets where the domestics are repositioning as a source to extend their reach.

Beyond the facility qualifier, manufacturers establishing additional representation today will demand verification of a dedicated floorplan line of credit at the onset of the process. Recently, many factory field offices have spent weeks and months going through entire new dealership application packages only to find floorplan financing has not been secured. It is important that the manufacturer is comfortable that a sound floor plan has been established at the beginning of the process. The commitment letter should be as detailed as possible at this point in time and provisioned to exceed the manufacturer’s minimum inventory requirements by 20 to 30 percent. By having floorplan taken care of at the onset, the applicant may jump ahead of equally qualified candidates and secure the final letter of intent.

While facility and floorplan issues have taken a more prominent role in the past year, the next three qualifiers discussed can be equally important when securing a new vehicle line. The ability to capitalize the dealership beyond the manufacturer’s standards, provide proof of above average sales efficiency and a history of satisfactory customer satisfaction performance are all key points to drive home for the dealer looking to acquire new franchise representation.

Establishing the financial ability to exceed the manufacturers capital requirements consists of more than just providing a statement of net worth or a personal financial statement. Manufacturers typically require that their prospective dealer candidates provide verification of exceeding working capital standards as provided by the manufacturers of their currently or recently past held dealerships. Many dealers feel that the request to review their past dealership financial statements is simply a measure to assess the dealer’s profit performance. While profitable dealers are important to the manufacturer, factory reps often spend more time reviewing historical dealership balance sheets than historical profit and loss performance. Specifically, they are looking for a track record of the dealer’s actual working capital exceeding the manufacturer’s determined working capital standard. A consistently under-capitalized dealer would be more of a detriment to securing a new franchise than a marginally profitable dealer who was in the red for a few months. If the working capital requirement is not on the dealer’s year-end financial statements, the manufacturer will most likely ask for a manufacturer working capital agreement or other document verifying the standard. In any case, it’s important to provide the manufacturer with a pro-forma opening day balance sheet that exceeds their working capital standard by a minimum of 10 to 20 percent.

Sales efficiency is another measurement that manufacturers use to assess dealer applicants. Sales performance is often gauged differently among the manufacturers. It is important to understand how the targeted manufacturer determines sales efficiency among its dealer body. The basics would include defining the dealer’s market area of responsibility and then reviewing the dealer’s actual sales performance compared to competitive registrations. A sales performance rating of 100 percent effective and beyond is often a qualifier among the manufacturers for approving a candidate for a dealer agreement. If sales efficiency reports are not available from the dealer’s existing manufacturer, then it is important to provide the manufacturer with similar factory reports showing sales performance above district, regional and/or national levels. Letters from the zone office commending dealership sales, top 100 reports, monthly sales standings, regional newsletters and other correspondence from the manufacturer may enhance or even replace sales efficiency reports for some manufacturers.

Customer satisfaction is a gray area as compared to capital, facility and sales performance. Customer satisfaction is often used on a case-by-case basis when reviewing dealer candidates. If a dealer applicant has many franchises, it is hard to expect that all of the franchises held will exceed manufacturer averages at all times. There is a good chance that either a sales or service score at one of many dealerships will be below average. The key is to provide the reports in the best light and if one particular store is below average, the dealer should submit a plan to the manufacturer that includes a process for improvement.

Manufacturers such as Kia, Subaru, Hyundai and VW are all looking at the actions of General Motors and Chrysler as an opportunity to upgrade exclusive dealer count and facilities. Each of these manufacturers is moving in the right direction. Which manufacturer you target is dependent on your own specific market and geography. It is important to determine the distances between same make dealers of the manufacturers you are targeting. Providing accurate maps detailing distances for both same make dealers and competitive dealers will enhance your proposal, as will providing demographic and registration information on your market. Finally, if the dealer applicant has just lost a franchise due to GM or Chrysler restructuring, it is important that the new dealer candidate communicate the goodwill that has already established during the many years of representation in the market. Manufacturers looking to move into these markets want quick results. A large customer base of satisfied owners may close the deal for the new franchise. Finally, the Great Depression created more millionaires than any other era in our history. This may be the best time in history to assess, evaluate and expand your dealership holdings.
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Greg Gilmore is president of The Apex Group, Inc., a non-brokerage firm that develops buy-sell and open point packages for its clients. He founded the company in 1997 following his tenure as market representation manager for Toyota Motor Sales, USA.